The ABC of Cheap Money

It has been reported that some companies have been struggling with the fall out from the credit crunch in recent months and my editorial this week relates to this scenario.

Firstly, I would like to preface my comments by saying this is a hypothetical situation and that we are only alleging that any such actions discussed have taken place. At my tender age I don’t want to go behind bars so I am going to make it tough for you or anyone else to link me to any person in particular. Besides the persons – plural – that may come to your mind will be rather pre-occupied with protecting their own behinds rather than chasing mine. But I am not talking about any individual. This is really just the story of a fairy tale gone bad.

So here goes.

Some investors have been reported to be using margin lending to buy shares. This is not in any company in particular – in fact it has been a number of investors across a lot of companies. These companies are not connected. The investors are not connected – in fact there are so many of them it would be tough to link them. Some investors I understand were directors. But I am not suggesting there was any insider trading.

Continuing… It appears some companies have been struggling a little in the credit fall out over the last several months. Share prices have become cheaper and those with a special interest in these companies have bought shares and more shares and more and more. And when they ran out of cash they then used margin lending to still buy more. They buy for a number of reasons – maybe because they think the share price is cheap, but they didn’t give any thought to the prospect that the share could become even cheaper. Like really seemingly dirt cheap or maybe just plain old dirt.

They buy also thinking that they and friends can ‘save‘ the share prices spiralling into the dirt. You have to remember that some of these people think they can walk on water and so believe they can fight the big players. They may have been able to do this in the past but when the ‘shorts’ really want to take you to the cleaners it’s best not to get in their way. We all know that as investors you can rarely use the same strategy time and time again as the market then begins to pick your move. I am not saying any one dobbed in these anxious investors who were trying to save their bib. Their moves stood out like you know what.

But we do live in a small village and chatter gets around fast.

I know these issues are very topical at the moment, but it is only history repeating itself. Some just don’t learn – it’s just different students and different teachers.

Margin lending is great, as is short selling; but not for kindergarten kids.